Imagine two employees in the same role at the same company — but living in very different places. One's in a high-cost city, the other somewhere much cheaper. Should they earn the same salary?
This is an age-old compensation question with no obvious answer. And the rise in remote work, which has given employees more freedom to choose where they live and work, has made it even more pressing.
In this article, we’ll break down three common approaches to global compensation, explore the pros and cons of each, and help you decide what’s right for your business.
Different approaches to location-based compensation
Broadly speaking, there are three main approaches to location-based pay:
- Location-agnostic compensation: All employees in the same role and level earn the same salary, regardless of location. Salaries are usually based on market rates in the city where the company is headquartered.
- Fully localised approach: Each employee’s salary is calculated based on benchmarking and cost-of-living data from their specific city or country.
- Location differentials: Pay is defined based on the company HQ, then adjusted up or down for different locations.
Let’s break those down in a bit more detail…
Option #1: Pay everyone the same, regardless of location
Companies that take a location-agnostic approach to compensation pay everyone according to the same set of salary bands, no matter where they live. In most cases, salaries are benchmarked to the company’s HQ, even if employees work remotely or from another location.
Some companies use this approach to gain a competitive advantage by basing pay on top-tier markets. For example, Buffer recently scrapped its mid-level bands and now pays all team members either a top rate based on San Francisco salaries or a slightly adjusted rate at 90% of that benchmark. They eventually plan to eliminate location-based salaries entirely.
Here are a few reasons you might choose this model:
- It’s simple to manage and doesn’t require extensive benchmarking or cost-of-living research.
- It feels fair to employees, especially those who choose to work remotely from lower-cost regions.
- It takes location bias out of hiring decisions.
There are also some downsides to consider:
- Basing salaries on your company HQ will likely mean overpaying some employees and underpaying others.
- Tying salaries to high-cost locations boosts competitiveness — but will lead payroll costs to skyrocket.
Option #2: Define specific compensation ranges for each location
This approach fully localises pay by benchmarking salaries at the city or country level. It reflects the fact that compensation varies significantly from one location to another based on the cost of living, talent availability and local market dynamics.
Here’s why it works:
- Employees are paid competitively in their own market, which can boost satisfaction and retention.
- It aims to equalise buying power across regions, making it feel fair from a cost-of-living perspective.
- It’s cost-efficient for the company — you’re not overpaying in lower-salary regions.
Of course, there are also some disadvantages:
- This approach requires ongoing benchmarking and multiple sets of salary bands and can get very complex to manage.
- It may be frustrating for remote workers who choose to live in lower-cost areas but still perform at the same level.
- It can raise tricky questions when employees relocate to lower-cost locations.
- It can unintentionally introduce bias, pushing hiring decisions toward cheaper locations instead of the best talent.
Option #3: Find a happy medium!
This hybrid model combines elements of both of the approaches above by using geographic differentials. Here’s how it works:
- Salaries are based on a central reference point (usually the company’s HQ.
- Then, they’re adjusted up or down depending on where the employee lives.
For example, a company based in Paris might base its benchmarks on the French capital, but pay London-based employees 10% more and Berlin-based employees 10% less. These adjustments are typically informed by reliable data, like market benchmarking data and cost-of-living surveys.
To keep things manageable, many companies group locations into tiers, each with a standard adjustment. Tier 1 might cover high-cost cities like London or New York at 100% of the base salary. Tier 2 locations might be set at 90%, and Tier 3 at 80%.
The benefits of this approach are simple:
- It’s considered fairer than a location-agnostic approach since it equalises buying power for employees based in different locations.
- It’s much less complex than a fully localised approach, requiring less work and making it easier for employees to understand.
Of course, there are also some potential drawbacks to this middle-ground approach:
- It can still feel unfair to employees in lower-cost areas doing the same work.
- It doesn’t allow as much nuance and flexibility as a fully localised approach.
What about remote workers?
These days, conversations about location-based pay don’t just concern employees working in different regional offices. With many employees hired on 100% remote contracts, employers are facing a new question: Should remote employees be paid based on where they live?
Some argue remote workers should earn less, since they:
- Don’t have to live in high-cost-of-living cities, and;
- Have lower work-related expenses (e.g. clothing, food, transportation).
But others maintain that, since remote workers cost the company less than onsite workers and are at least as productive, they deserve to be paid (at least) the same amount.
If you do decide to adjust remote workers’ salaries, there are a few options to choose from:
- Base compensation on actual location: This is the most tailored option, and arguably the fairest. It involves basing salaries on where the employee lives, using local market data or tiered structures. However, it’s an admin-heavy approach, and can sometimes cause tension for employees who relocate to lower-cost areas.
- Base compensation on offices: This is a simpler model where pay reflects the salary linked to the employee’s nearest office or the one that hired them. While this can make things easier from an administrative perspective, it can feel arbitrary to 100% remote employees who may live miles from their nearest branch.
- Create specific differentials for remote employees: Some companies set dedicated pay ranges for remote roles, often defined by country. For example, a company may have one set of salary bands for onsite employees in London and another for remote workers in the UK.
There’s no universal answer here — each company must come up with its own approach based on its compensation philosophy, organisational goals and core values.
Location-based pay and pay equity laws: Are they compatible?
Some employers are understandably wary of paying employees different salaries for the same work — especially in light of new pay transparency legislation. While this is a healthy instinct, we have some good news: it’s perfectly legitimate to take objective factors like employee location into consideration when setting pay levels.
The key thing is that employers must be able to justify why one employee is paid more than another in the same role — whether that’s down to market benchmarking, geographic differentials or cost-of-living adjustments. Keeping an eye on pay equity metrics and maintaining thorough documentation can help protect your company against any potential issues.
Best practices for effective global compensation
Want to get location-based pay right? Here are a few best practices to keep in mind as you build your strategy:
- Choose one consistent approach: None of the location-based pay models we’ve talked about here is inherently fairer than the others, as long as it’s applied consistently across the organisation. However, switching between approaches or applying them unevenly can undermine fairness, damage trust, and increase the risk of pay equity claims.
- Review and update regularly: Salaries and cost-of-living benchmarks change quickly. Whether you use tiers or localised ranges, aim to review your data at least once a year to keep pay competitive and aligned with market conditions. This helps avoid underpayment, overpayment and creeping inequities.
- Document everything: Companies should keep clear records of their benchmarking sources, pay bands, location tiers and adjustment formulas. Good documentation ensures transparency, supports future decision-making, and protects your business if questions about fairness or compliance arise.
- Leverage technology: Compensation management platforms like Figures can help you automate benchmarking, apply geographic differentials, and generate equity reports. This reduces manual work and improves accuracy — freeing up your team to focus on strategy.
- Align your approach with your culture and employer brand: Lastly, make your compensation philosophy part of your internal and external messaging. Whether you prioritise equity, simplicity or cost control, explain your reasoning clearly. When employees understand why you’ve chosen a particular model, they’re more likely to view it as fair — even if they don’t always agree with the outcome.
How Figures can help
No matter which global compensation you choose, the right tools will make implementation far easier. Figures can automate benchmarking, apply geographic differentials, and generate detailed pay equity reports — all in one user-friendly tool.
Using a compensation management tool like Figures saves time for your HR team so they’re free to work on strategic initiatives. It also ensures fairness and transparency across your organisation, ensuring your employees understand — and trust — your approach to compensation.
Ready to simplify your global compensation strategy and make confident pay decisions? Sign up for a free demo to see Figures in action.
